UNEP e-learning Course on. Insurance Risk Management for Renewable Energy Projects. Module 3 Underwriting Guidelines and Policy

UNEP e-learning Course on Insurance Risk Management for Renewable Energy Projects Module 3 Underwriting Guidelines and Policy

UNEP e-learning Course on Risk Management Instruments for Renewable Energy Projects Module 3- Underwriting Guidelines and Policy Overview The training is organized in 6 modules and fits into a two day training schedule: Module Main Content Length of Module 1 Climate Change Briefing, policy frameworks and business impact 2 Renewable Energy Technologies and Risks 3 Underwriting Guidelines and policy Renewable Energy technologies policy, investment trends and risks Underwriting information, guidelines, risk evaluation, coverage evaluation 4 Claims handling and policy Claims information, management, reserving, legal and payment 5 Intermediaries and networks Project development, information and consultation 6 Case study Renewable Energy case study, risk assessment, impact and suitability of instruments Total 2 hours 3 hours 5 hours 2 hours 1 hour 3 hours 16 hours Page 1

Module 3 Contents Objectives Introduction Lesson Core o Section 1 Basic Underwriting Principles o Section 2 Basic Insurance Product Offerings for RET o Section 3 Basic Underwriting Processes and Guidelines o Section 4 Risks and Barriers in RET Underwriting o Section 5 Wind Power Considerations o Section 6 Hydro Power Considerations o Section 7 Solar Power Considerations o Section 8 Biomass Power Considerations Lesson Review Further Reading & Related Links Examination Lesson Objectives Underwriting principles Insurance availability Specific consideration for RET To provide an overview of the basic underwriting principles and guidelines that are considered in the context of insurance underwriting. To explain the main insurance offerings for RET. To describe specific considerations for the four primary RET: wind, hydro, solar and biomass. Introduction Page 2

Insurance for Renewable Energy Technologies (RET) follows the same structure and processes as do traditional insurance interests such as energy power plants and machinery. The same underwriting principles and guidelines apply. A clear underwriting philosophy, reliable pricing mechanisms and stable underwriting guidelines are required elements to successfully insure RET. RET insurance products cover the main lines of insurance such as property, engineering, marine, energy and liability. Additional special types of insurance can be made available; such as credit, political and weather risks, Errors & Omission (E&O), and Directors & Officers (D&O) are underwritten, carbon and CDM registration insurance. For RET, there are no new underwriting processes and guidelines. The basic information required for diligent underwriting of RET is mainly the same as for traditional businesses such as machinery or energy installations. RET poses some specific risks and barriers. Technologies applied are relatively new and the available expertise and actuarial data is still low. There are few standard products and underwriting is primarily done on a case-by-case basis. Some specific underwriting considerations for wind, hydro, solar and biomass apply. The remainder of the module walks through these specific requirements and introduces standard insurance application forms for these four RET. Page 3

Section 1 Basic Underwriting Principles This section provides an overview of the main ingredients of successful underwriting, understanding the market mechanisms, applying sensible pricing and reliable underwriting guidelines. This also fully applies for RET. Section 2 Basic Insurance Product Offerings for RET This section covers the available basic insurance offerings for RET. Products offered are property, marine, engineering, energy and liability. Also special lines such as crime, E&O, D&O and credit, political, weather risks and emission reductions are considered in the context of RET offerings. Section 3 Basic Underwriting Process and Guidelines This section provides an overview of the basic underwriting process and guidelines and gives a short introduction into the main standard information elements required for underwriting as well as the basic guidelines and clauses that normally are applied in insurance underwriting. Section 4 Risks and Barriers in RET Underwriting This section lists the main risk and barriers for RET underwriting. Key barriers for RET underwriting include the missing expertise and lack of actuarial loss data. Sections 5 through 8 Specific Considerations for Different Technologies This section introduces the specific underwriting requirements for Wind, Hydro, Solar and Biomass. Page 4

1 Basic Underwriting Principles Insurance protects against the risk of a contingent loss triggered by a physical, human or natural peril. The insured transfers a defined risk of a loss in exchange for a premium, which is an insurance rate used to determine the amount to be charged for a certain amount of insurance coverage. An insured is thus said to be "indemnified" against the loss events covered in the policy. Insurers underwrite risks within clear constraints. Their available equity or surplus is limited and thus the risk-taking capacity cannot exceed a certain amount. Also, certain regulatory and legal limitations apply, especially in emerging and developing countries. Risks that qualify for underwriting must be diligently assessed, rated and priced. Any insurance company relies on an underwriting philosophy, and is confronted with specific market conditions. The market conditions are defined by the insurance cycle. The degree of understanding of the insurance cycle will influence the risk appetite of the insurer and insured. Risk Philosophy The risk philosophy describes the balance between risk taking, risk tolerance, risk management and risk ownership. Insurance Cycle Non-life insurance business is characterized by the insurance cycle. The insurance cycle refers to the periodic oscillation of the market between soft and hard phases. The soft market is characterized by decreasing premiums, less capital and less competition. The hard market exhibits growing premiums, new capital influx and more stringent underwriting guidelines. A hard market can be triggered by a large loss event such as natural catastrophes. A soft market follows the hard market once the insurance market is saturated, that competition has taken off and premiums has started to decline. Taking risks is the core of the insurance business. The key challenge for the insurers is to balance the risk appetite and the risk tolerance in a sustainable way: The risk appetite is the additional marginal amount of risk a company is willing to accept in order to gain a business benefit. The risk tolerance is the setting of a maximum exposure level an insurance company is willing to accept in order to be able to meet all of its obligations. Normally this is the surplus capital or the available risk capital. Risk management is the process of defining the project s objectives, assessing, reporting, deciding on, treating and monitoring the risk. Risk ownership refers to the ultimate owners of the risk. In an insurance company these are the shareholder representatives in the Board of Directors and their delegates in the Executive Team. In a project these are the project sponsors. Page 5

The cycle Management is the active management of the insurance cycle. Depending on the state of the market (soft or hard) different underwriting policies will apply. Normally in a soft market, the following guidelines are suggested: Set premiums in a prudent and risk-based way; Install state-of-the-art risk management tools; De-link underwriting from available surplus or high investment returns; Redeploy capital to sustainable insurance lines and implement smart incentives. Depending on the frequency and severity of the losses, different insurance mechanisms will apply. For low-severity and low-frequency events, self-insurance or risk retention is used. National insurance markets are strongly positioned for high-frequency and low- to mid-severity events. Higher severity risks are covered by international insurance and reinsurance groups. The highest severity risks might be securitized on the global capital markets or covered by public risk finance tools such as credit delivery guarantees. Insurance companies must be able to price their products in an economically sustainable way. The price depends mainly on the expected loss. Pricing mechanisms Price = Expected Claims + Admin Costs + Risk Premium. Expected Claims Payment are the payments the insurer must potentially make to the insured party under the contract. Administrative Costs cover all the administrative, distribution and other costs the insurer bears in order to provide the policy protection. Risk Premium covers the capital and interest costs. Underwriting guidelines and policies define the underlying operational execution principles for risk underwriting: Underwriting guidelines include the following elements: Underwriting Data Requirements for Risk Assessment / Risk Rating. Interests Insured and Insurance Options. Coverage (Limits, Deductibles), Terms & Conditions, Exclusions. Capacity, Pricing, Processes and Acceptance. Accumulation Controls, Natural Catastrophe (Nat Cat) Exposure. Page 6

Underwriting Data Requirements for Risk Assessment / Risk Rating Standard insurance forms are used to collect information from project developers which will help assess the risk exposure of the project. The different risk appraisal steps are: 1. Risk engineering: Understanding the mechanics of the risk to be insured. This is normally done by experts and relies on available exposure and loss information. 2. Risk assessment: Identifying, describing, estimating and evaluating the various risk factors that are relevant in the context of the technology, environment and other risk factors. 3. Risk rating: Based on the risk assessment, a rating provides a rough guideline of how good or bad a risk is. The three generic ratings for RET are prototype, unproven, and proven technology. Different ratings might imply underwriting decisions. It can be difficult to find insurance for technologies that are rated as prototype. Interests Insured and Insurance Offering The insured has an interest in a property that is subject to insurance. Damage, destruction, or value reduction of that property would cause the insured to incur financial loss. This must be demonstrated when a policy is issued and must always exist at the time of loss (with the exception of life insurance). For RET the most common interests insured are property values (such as machinery, turbines, platforms, installations, warehouses, and buildings), the business value generated from the property (revenue, rent, profit), liability values (third-party) and specific interests (construction phase). Insurance offerings consist of the products that indemnify, or hedge, the risks identified with regards to the insured objects. In today s markets for most common risks, standardized insurance products are offered. For complex and new risks, new technologies, lack of expertise and loss experience, or large capacities, customized policies are issued. This applies for RET projects in many cases. Customized policies are normally more expensive than standard products. Coverage (Limits, Deductibles), Terms & Conditions, Exclusions Once the risk has been assessed, reported and decided upon then the appropriate coverage, the terms and conditions that apply as well as the exclusions in the coverage can be developed. Coverage includes setting the limits and deductibles in order to come up with an attractive insurance offering. For RET, most terms and conditions are derived from the ones used in property, engineering and energy insurance policies. Exclusions are a critical factor to be considered in the contract stage. Some standard exclusions apply for risks such as war, terrorism, natural catastrophe (nat cat), etc. Also some specific exclusions are applied case by case. Page 7

Capacity, Pricing, Processes and Acceptance Once the details of coverage, terms and conditions have been agreed upon, an insurance capacity is suggested, and the premium (pricing) as well as the acceptance are set. Accumulation Controls, Nat Cat Exposure In parallel to the pricing and capacity setting, accumulation control of a risk in an existing pool of risks must be strictly governed. Also specific risk exposure information must be analyzed with regards to Nat Cat events and the exposure to these perils. Page 8

2 Basic Insurance Product Offerings for RET Traditional and already available classes of insurance are relevant in conjunction with RET projects and operations. As of today, RET coverage is a combination of traditional insurance products. However insurance companies that are active in the renewable energy arena have set up specific underwriting teams for renewable energy or alternative energy. Type of Insurance Property Engineering Marine Energy Scope Property insurance covers the damage and loss to property. Physical Damage / Operating All Risks applies to losses from all accidental and unforeseen causes with the exception of perils that are specifically excluded from the policy. Engineering insurance is specifically used to protect construction works, as well as erection and operation of machinery. Non-renewable coverage is used for projects under construction and/or erection. Renewable coverage is used for installations, equipment and machinery once they are ready for commercial operations. Marine insurance provides coverage for hull and cargo. Hull covers all types of vessels that float. Cargo provides coverage for anything that is loaded in any type of vehicle or vessel for the purpose of being transported. Energy insurance is traditionally for oil platforms. It provides coverage for platforms and equipment in offshore oil operations and exploration as well as for all supply vessels serving the offshore oil fields and offshore pipelines. Nuclear coverage is often considered as a separate class of insurance due to its very specific risk characteristics. Relevance for RET Physical Damage / Operating All Risks for a company s property value, including properties where RETs are installed. Non-renewable and renewable coverage for RET installations (construction and operations phase). Marine coverage for transport to and from RET sites. RET might establish a new class of insurance in energy underwriting. Liability: General / Third Party General Liability offers personal and commercial coverage for the financial Page 9 Liability coverage in conjunction with construction and operation of RET

Crime, Fidelity, E&O, D&O Credit Risks Political Risks Weather Risks Emission Reductions consequences of damages claimed by third parties that are not included in property, employers, motor and marine liability. Third Party Liability (TPL) considers the impact of construction and operation work on third parties (visitors, neighbors) or employees that incur bodily or physical property damage. Crime, Fidelity, Errors & Omissions (E&O) as well as Directors & Officers (D&O) covers are additional special lines of insurance considered to be relevant for some RET projects, especially when there are many project stakeholders, complex ownership (owners, employers, developers) and new emerging technologies involved. Credit Insurance and Credit Delivery Guarantees offer protection for the payment risk resulting from the delivery of goods or services. This is caused by the counterparty being unable to pay as a result of protracted default, insolvency or bankruptcy. Political Risk insurance offers protection against political conditions that result in a loss. These can be political violence, governmental actions (expropriation, confiscation, repudiation of assets) or other issues such as currency inconvertibility or inability to repatriate funds. Weather derivatives are instruments used to hedge against the risk of weather-related losses. The underlying assets are measurable weather events and patterns such as rain, temperature or snow. Certified Emissions Reductions (CER) Futures offer protection against unwanted price developments in the CER market. A put option with a defined price (strike) gives the buyer of this option the right to perform a CER sale at this price up to a certain date (strike period/ strike date). installations. These covers are relevant for specific issues with regards to project ownership (D&O) and emerging technologies (E&O). Credit coverage in conjunction with counter-party exposure in RET projects. Political risk coverage in conjunction with political exposure in RET projects. To hedge dependency on weather patterns for wind and solar installations, as well as other RETs. To hedge uncertainty of CER price movements for all RET projects generating CER. Page 10

With regards to constructing, erecting and operating an RET installation, the main insurance offerings are property and engineering products: 1 Physical Damage / Operating All Risks Construction All Risks (CAR) Erection All Risks (EAR) Advance Loss of Profit (ALOP) / Delay in Start-Up (DSU) Contractors Plant and Equipment (CPE) Machinery Breakdown (MB) Business Interruption (BI) Renewable policy to protect against losses / damage to property that has been erected and is operational. Non-renewable coverage to protect against losses in the construction phase. Non-renewable coverage to protect against losses in the erection phase. Non-renewable coverage in conjunction with CAR and/or EAR. To protect against loss of income or profit during the construction or erection phase. Renewable policy to protect against losses on a plant and equipment independent of the location or project. Renewable policy to protect against losses to machinery that has been erected and is operational. Renewable policy to protect against loss of income or profit if operations are interrupted because of loss. Physical Damage / Operating All Risks Definition Physical Damage / Operating All Risks covers all physical damages to tangible property and plant assets that have been erected and are operational. Coverage Sudden and unforeseen physical loss or physical damage to the plant / assets during the operational phase of a project subject to exclusions. Insured Parties Sum Insured Main Hazards Exclusions Owner of the plant. New replacement value of the insured plant assets that can be defined as the cost of replacing by a new one of the same capacity. This includes transport and erection costs, as well as taxes and customs. If total loss occurs the indemnification might be restricted to the actual cash value. Fire and explosion, theft, burglary, collapse, earthquake, seaquake, landslides, storms and flood. Perils might vary from location to location. Standard exclusions are war, other political perils, seepage and pollution, contamination, nuclear energy risks. Further exclusions apply case-by-case. 1 For further information see the Swiss Re publication Engineering insurance and reinsurance, 1997. Page 11

CAR Construction All Risks Definition Coverage Insured Parties Sum Insured Main Hazards Exclusions CAR insurance covers all types of building and civil engineering construction and offers protection against hazards that may threaten the work under construction. All Risks basis for physical loss damage to the insured property subject to the damage being unforeseen and accidental, and subject to exclusions to the policy. Insured parties are project owners, principals and contractors. Total contract value e.g. the anticipated value of the completed works including materials, salaries, transport, custom duties, taxes and the value of any material or labor supplied by the principal. Fire and explosion, theft, burglary, collapse, earthquake, seaquake, landslides, storms and flood. Perils may vary from location to location. General exclusions are liquidated damages or penalties for delay or detention, or in connection with guarantees of performance and efficiency, willful acts or omissions or gross negligence of any director, manager or responsible party on site, nuclear risks and political risks. Further exclusions apply to normal upkeep, consequential loss of any kind, or loss of use, wear and tear, corrosion, erosion, or deterioration due to lack of use and other reasons. EAR Erection All Risks Definition Coverage Insured Parties Sum Insured Main Hazards Exclusions EAR insurance covers the erection of individual machines such as lifts or complete systems such as power stations. All risks basis including coverage for testing and commissioning of erected machines, subject to the damage being unforeseen and accidental, and subject to exclusions to the policy. Same as CAR. In addition the machinery manufacturer might be included as an insured party if performing a function on the erection site. Anticipated value of the completed works. Might be adjusted during the course of erection. Final total investment is declared upon completion of the project. Main hazard is fire and explosion, and machinery breakdown during testing and commissioning. Further hazards depend on the type of works and location for instance if indoors, forces of nature are less relevant than in CAR. Exclusions are the same as for CAR. Page 12

ALOP / DSU Advance Loss of Profit / Delay in Start-Up Definition Coverage Insured Parties Sum Insured Main Hazards Exclusions Business income protection to cover for losses of the gross profit resulting from a delay in completion of a construction and / or erection work. Underlying CAR and/or EAR must be in force. Actual loss of gross profit sustained from a delay in the completion of the project. Loss must be covered in the respective CAR and/or EAR. Principal or owner of project to be constructed or erected as defined in the underlying CAR and/or EAR. Expected annual gross profit, revenue, rent, or fixed costs to be defined case by case. Loss events as defined for CAR / EAR. General exclusions are the same as for CAR / EAR. Further exclusions apply to restrictions imposed by public authorities, alterations to the insured works after the occurrence of the material damage accident, and delays caused by further reasons also some specific nat cat perils such as earthquake, volcanic eruption, tsunami and hurricane if not agreed to in writing. CPE - Contractors Plant and Equipment Definition Coverage Insured Parties Sum Insured Main Hazards Exclusions Renewable cover for plant and equipment used by contractors at different locations. All risks basis for unforeseen and accidental physical loss or damage due to external causes. Owner of the insured plant and equipment. New replacement value of all plant and equipment insured under the policy including freight costs, customs and erection costs. Working accidents, fire, burglary, theft, faulty operation, natural perils such as earthquake, storm and flood, collision and overturning. Excludes mechanical and electrical breakdown. Normal wear and tear, lack of oil or coolant, deposits of rusts, exchangeable tools and parts and further reasons are excluded. MB Machinery Breakdown Definition Renewable coverage which offers protection against sudden and unforeseen physical loss or damage to machinery that has been erected and is operational or at rest. Page 13

Coverage Insured Parties Sum Insured Main Hazards Exclusions Policy pays for all repair costs, or in case of total loss or repair costs exceeding the actual value of the machinery, the actual value is indemnified. Owner of the machinery. New replacement value of the insured machinery that can be defined as the cost of replacing by a new one of the same capacity includes transport and erection costs, taxes and customs. Working accidents, centrifugal force tearing a machine apart, short circuits, defects or faults in design, material or manufacturing, incorrect operation. Corrosion, erosion, wear and tear, overloading, and further specific exclusions might apply. BI Business Interruption Definition Coverage Insured Parties Sum Insured Main Hazards Exclusions Business income protection to cover losses of the gross profit resulting from a disruption in the operational performance of a company because of property loss. Policy pays for actual loss of gross profit sustained resulting from a disruption in operational performance. The insurance protects during the time period it takes to achieve commercial operational readiness again. An indemnity period (mostly with maximum of 12 months) and a time deductible are agreed. Owner of the operations / company. Expected annual gross profit, revenue rent or fixed costs to be defined case by case. Loss events as defined for Physical Damage / Operating All Risks. General exclusions are war, other political perils, seepage and pollution, contamination, nuclear energy risks. Further exclusions apply case-by-case. Page 14

3 Basic Underwriting Processes and Guidelines The following underwriting guidelines are valid for all underwriting affairs and cover the setup of a standard underwriting form and standard underwriting clauses. A standard underwriting form for RET business (generic form) consists of following information: Elements Contracting Parties Occupancy or Project Scope of Coverage / Coverage Geographical Scope Period Description Name and address of carrier and insured. Full legal names of the carrier and insured corporate entity with complete address. Also name of broker if applicable. Occupancy must be listed. In case of coverage limited to part of the corporate activity this must also be specified. General description of the scope of coverage such as CAR / EAR, Operating All Risks, etc. Description of the geographical scope if not worldwide. Either use name of existing states, territories with settled political boundaries, or regions (not for Political Risk policies). Renewable Covers: Inception and Expiration date for coverage. Non-renewable covers: Inception date. Structure of Contract Total Insured Value (TIV). Exposure and Risk Quality Exclusions Specific Perils Nat Cat Loss History Choice of Law Claims provisions Limits and Capacity provided by insurer or reinsurer [based on limit, ALP (anticipated loss potential), MPL (maximum possible loss) or other base] plus deductibles. Premium (100%) and Deductions. Location set inclusive top location. MPL per location. Exposure risk quality / Rating if applicable. Specifically excluded perils. Sub-limits and deductibles per specifically included perils. Sub-limits and deductibles per natural catastrophe peril if applicable. Add loss history information if applicable (Year, Loss Description, Total loss). Applicable law must be agreed upon before coverage commences. Law must be acceptable pursuant to the contract preferences of parties involved. Must refer to the substantive law of a particular state or country. Specific claims-related provisions related to the claims settlement process must be listed. Claims control clauses as applicable. Page 15

Standard underwriting guidelines set up the clauses which cover a list of required elements in order to issue an insurance contract. Here is a list of typical principles: Guideline Basic requirements Indemnity or Insuring Clause Disclaimers of legal duty for disclosure Accumulation control Nat Cat clause Contingent Business Interruption Reinsurance Proceeds Clauses Definition Occurrence / Events Definition Values Reported Fronting arrangements Multiyear Coverage Claims considerations Description Insurance follows the principle of indemnity. Policy should make clear what the scope of the coverage is, for example, for which liability, loss, damage, injury or expense the policy will pay or indemnify. Terms like permanent damage, accidental, sudden, and unforeseeable should be clearly defined with regards to what is excluded. Contractual waivers of insurer s rights and remedies at law arising from pre-contractual non-disclosure or misrepresentation of material facts are subject to approval in each situation. Insurers prefer to retain all rights and remedies available at law. Systematic tracking of the accumulated risk exposures regarding capacity controls, natural catastrophe scenario exposures, terrorism covers and Contingent Business Interruption (CBI) covers. Nat cat perils have to be specifically enumerated. Capacities are locally allocated. There are specific considerations for Contingent Business Interruption coverage for unnamed suppliers and customers. Insurers might set a maximum limit of liability for this kind of BI coverage (as a percent of sum insured, as loss limit, and as absolute amount). Similar limits apply in case of public utilities and denial of access where an additional time deductible might apply. In cases of reinsurance, a list of specific clauses is explicitly considered such as cut-through clauses, loss-payee clauses, and arrangements. Typically they are avoided or restrictively handled. Definition of property occurrence must aggregate all loss or losses arising from one common cause, event, or catastrophe during the period of insurance. If an hour s clause is applicable, the covered time period is limited to a certain length, typically 72 hours. Value basis (Real or Actual Cash value, BI values, etc) must be defined and reviewed. Fronting arrangements are granted in specific constellations. Renewable covers normally are based on one-year coverage. In some cases, multiyear covers are also granted. Non-renewable covers for engineering projects might easily achieve multiyear status. Claims cooperation clauses cover the duties of the insured to provide to the insurer all information relevant to a covered loss. Page 16

Claims notification clauses describe the specified time and further considerations such as prompt, immediate, or as soon as reasonably practicable. Extensions Exclusions Extensions of coverage vary depending on the type of insurance and coverage. They typically cover extra costs and expenses borne from the loss, debris removal, expediting costs, and extensions with regards to liability and manufacturer s risk. Exclusion clauses typically consider following risks: Excluded Countries Insurers maintain lists of excluded countries where they do not write any business. This includes relationships with public or private clients, acceptances and risks located in these countries. Political Risks typically are not written by property, energy or engineering insurers. They are covered by credit insurers. Reputational risks are considered in case of publicly-controversial environmental, social, ethical and political issues. Insurers do adhere to strong internal compliance rules with regards to ethical principles in writing sensitive business risks. Terrorism clauses might be added for very large and exposed risks. War and civil war clauses typically are not written by property, energy or engineering insurers. Page 17

Risks and Barriers in RET Underwriting Frequencies and severities of losses associated with renewable energy projects are not fully known. Technology innovation happens quickly. RETs evolve quickly which often lead to a general lack of underwriting experience due to lack of data and expertise on the new technologies. Risks and Barriers Technology efficacy Technology risk profile diversification Technical perils Technology replacement cycle Local economic conditions Regulatory environment Natural catastrophe hazards Accumulation control and vulnerabilities Description For insurance companies, a new RET product is a significant bet on technology with regards to reliability, quality and costs. Efficacy of the technology is still in doubt with regards to operational reliability. Technologies that are considered to be at an early stage such as certain RET do lack the operating history and provide a limited amount of loss information for loss projections and pricing. Underwriting multiple insured using the same, yet not fully proven, technology might generate many losses. The risk profile of existing mature technology is different from new technologies. A portfolio of risks in a new technology can be strongly nondiversified. Certain RETs present concerns during construction, testing and commission phases. Often high risk and complex engineering processes, procedures and contracts / equipment are involved. Which create perils with regards to handling, erecting, testing and commissioning a new installation. Technology innovation might lead to the replacement of a relatively new technology by an even newer technology. This is true for areas where new designs are introduced in short cycles and no single design becomes dominant. The same technologies are deployed in different localities and countries. Mere knowledge about the failure behavior of a new technology is not sufficient. Environmental factors such as local maintenance practices, supply channels, and operating conditions might also have a severe impact on the loss exposure. Government actions, regulations, and taxes typically favor some specific RETs. In some emerging markets and developing countries, restrictions towards market access of foreign players are in place which means that a certain proportion of the risk is reinsured by local insurers. Impact of natural hazards on engineering insurance is partially understood. Increasing frequencies in extreme atmospheric events such as floods, storms and heat waves have been observed. This leads to an acceleration of secondary effects (losses). Currently, the percentage of losses in engineering insurance triggered by natural events is between 10% (Europe) and 75% (Taiwan). Individual structures and systems on a property may have very different vulnerabilities with regards to nat cat events. Some mobile machinery and Page 18

Credit and counterparty risks Market conditions Availability of data Availability of experts Infrastructure and local markets Local insurance markets equipment have variable exposure during events depending on their exact location at the time of the event. Problems with business interruption coverage often arise due to the inability to account for the whereabouts of mobile plants and equipment. EAR / CAR coverage is faced with changing values during the erection period. At the end of the erection period, the value at risk (VAR) is typically at its maximum and poses a much higher vulnerability. A loss caused by natural hazards can result in ALOP or DSU coverage at any time during construction. For each RET project, an actual or perceived credit risk posed by the project s host country or developer exists. The smaller and less experienced the suppliers and consumer groups are, the more difficult it becomes to overcome the perceived credit risk. Credit enhancements provided by public funds are considered a very effective tool in order to support private financing of RET projects. Generally for RET and other new technology risks, a small group of insurers and reinsurers are positioned as leaders. They have a reputation for technical expertise and can dictate the terms and conditions of the policy. They will be supported by a group of companies who are prepared to follow the leaders terms and conditions. Over time, more leaders are established and businesses will be underwritten jointly with different terms and conditions. An extensive and long-term database of empirical claims, losses, damages occurrence rates etc, is one of the most useful tools for underwriting. Improved actuarial data is a key facilitator for product development and underwriting in RETs. If historical loss and exposure data is not available, experts must be able to identify the risk exposure profile of a new technology. This includes educated predictions of potential failures, and the possible frequencies and severities of losses. Adequate financial, legal and service infrastructure is a key enabler for RET in developing countries. In some emerging and developing economies, national insurance regulations tend to protect insurers or reinsurers by restricting access to local markets. A comprehensive risk analysis is a key step to completely understand the challenges, pitfalls and necessary insurance needs of a RET project. Below is an example of considerations commonly applied in the insurance process for a large-scale wind project following the typical project stages of project development, construction, testing and commissioning, and operating. Page 19

Risk analysis example for a large-scale wind project Risk Project Stage Details Permitting / Planning Delays Contract bankability CER bankability Contractor nonperformance Engineering risk Physical hazard (caused by man or nature) Offtaker contract failure Catastrophic design failure Process Interruption Project Development Project Development Certified Emission Reduction Construction, Testing and Commissioning Construction, Testing and Commissioning Construction, Testing and Commissioning Construction, Testing and Commissioning Construction, Testing and Commissioning Operating Risk of delay due to inability to obtain building permit / planning or other regulatory consent. Risk of being unable to secure bankable offtaker / fuel supply contract. Risk of Certified Emissions Reductions (CERs) not being recognized as bankable revenue streams. Risk of EPC (Engineering, Procurement, Construction) and turnkey contractors being unable to deliver to specification and to budget on time. Risk of physical loss or damage to property caused by technical / engineering hazards (e.g. defective design, faulty parts and/or workmanship). Risk of physical loss or damage to property caused by human and/or natural hazards / catastrophes (e.g. fire, lighting, explosion, earthquake, flood, windstorm). Risk that power offtakers withdraw from contract subsequent to financial closure. Risk of complete mechanical or control failure during testing and commissioning due to defective design. Risk of complete plant shut down (total process interruption) at any time due to unscheduled maintenance. Natural hazards Operating Risk of physical loss and/or damage to the plant and/or machinery breakdown caused by natural hazards / catastrophes (e.g. fire, lighting, explosion, windstorm, flooding). Design / Engineering Risk Physical hazard (caused by third party) Operating Operating Risk of physical loss and/or damage to the plant and/or machinery breakdown caused by design / engineering perils (e.g. defective design, faulty parts and workmanship, all occurring outside the scope of any warranty protection). Risk of physical loss and/or damage to the plant caused by human hazards external to the project (e.g. strikes, riots, civil commotion, war). Wind volatility Operating Risk that average wind speeds falls below required thresholds to generate economically efficient power outputs / electricity. Offtaker default Operating Risk of the electricity offtaker defaulting on contractual Page 20

Warranty nonperformance Operating obligations under PPA (Power Purchase Agreement). Risk of the warranty provider failing to meet contractual obligations. Legal liability Operating Risk of the legal liability caused by bodily injury or property damage to third parties. CER-Specific Risks Certified Emission Reduction Risk of CER delivery shortfall or failure due to Kyoto regulatory risk (e.g. changes to baseline methodology, monitoring procedures, additional rules or other eligibility criteria), host country political action (e.g. expropriation, nationalization, confiscation and prohibitions in connection with the sale of CERs), lower than expected plant performance, or insolvency of project proponents. Risk of limited marketability of emission reductions post 2012. Page 21

5. Specific Considerations for Wind Repetition from Module 2: Refer to Module 2 Section 2 Characteristics Overall attractiveness Current situation Description Significant growth potential. Trend to off-shore wind farms. Ideal operating conditions Specific window of wind speed (between 10 and 25 m/s) required. Insurance maturity and loss experience Early phase of large underwriting losses. With latest increase of projects there is more underwriting and loss experience available. Major known loss factors Design and material, lightning, storm, short circuit, fire. Insurance offerings Used to be part of main property insurance package. With growing project sizes and numbers, specific policies are becoming available. Insured limits of up to USD 500 million have been placed. Construction phase: CAR, DSU, TPL available. Operational phase: Operating All Risks, MB, BI Key Risks Long lead times and up-front costs. Critical component failures. Wind resource variability. Offshore cable laying. Risk Management Drivers / Measures Make and model of turbines. Manufacturing warranties. Loss control. Best practice procedures. Traditionally, commercial wind energy projects have been owned and developed by large power companies. Insurance has been provided under the main property package covering all parent power assets worldwide. However this unspecialized policy did not provide adequate coverage to the unique risks profile of the wind sector especially in case of off-shore wind projects. Wind underwriting has gone through an early phase of losses but has achieved a good level of maturity. In comparison to other RET covers, there is already a competitive insurance marketplace for on-shore wind energy projects. Premium rates for physical damage coverage are in the range of 0.3 to 0.4% of total insured property values. Off-shore projects have a more risky profile and underwriting experience is not as advanced. Insured limits placed on the market have been up to USD 500 million. It is expected that more capacity will be made available with growing expertise, more projects and operating hours, more policies placed, and more loss data available. Delays or damages during fabrication, transport, installation, or testing and commissioning are key concerns during the construction process. Risks in the off-shore area are significantly larger than with on-shore projects. Off-shore DSU and ALOP policies are more expensive and have more restrictions and deductibles than on-shore policies. DSU premiums for off-shore projects are in the range of 2 3% of annual gross revenue to be expected. Future growth of DSU coverage is limited by the availability of marine infrastructure (vessels) to service sites and repair or replace damaged items. Page 22

Once operating, Operating All Risks policies are available. Insurers might want to verify the loss control measures against perils such as high wind, freak wave conditions, fire and lightning and vessel collision. With regards to design and technology risks, some restrictions also apply. Insurers do not provide a broad design coverage for new and prototypical turbines. Clauses regarding component replacement (after 5 years or 40'000 operating hours) also apply. Project owners and developers might have to rely solely on warranties provided by the turbine manufacturers. This again creates credit risks with regards to the manufacturer s creditworthiness. Today s new projects emerge with new, larger turbines (5 MW and more). Appropriate insurance for defective parts and consequential losses (BI) is very difficult to attain. Therefore so-called Contractual Service Agreements (CSA) are directly offered by large turbine manufactures which guarantee the technical operation of the system over the term of the financing agreement. Generally, business interruption coverage is a major concern. Loss of a single turbine does not affect substantially large scale wind projects operations; however the loss of export cables or transformer should lead to the interruption of the overall electricity output. For off-shore wind, a BI cover is very much dependant on the design and location of the project. Insurance Characteristics for Wind Characteristics Main challenges Main exclusions or restrictions Description Construction phase: The construction phase is a key area of concern for the investor and subject to many issues regarding to new technology and prototypes. Delay in Start Up coverage is limited by issues regarding the availability of marine infrastructure to quickly service sites in order to repair and replace damaged items. Operational phase: Offshore technology is still not yet fully proven in challenges such as cabling, weather, and repair lead times. Space and landscape requirements challenge on-shore parks. Power distribution and volatility of power generation requires back-up power installations. Business Interruption is difficult to obtain because of the potential for cable or transformer loss in offshore wind parks. Offshore construction projects present higher risk, therefore higher premiums (2% of project cost) and higher deductibles apply. Design and technology risks associated with wind turbines result in no coverage for design of new and prototypical turbines. Loss control Control measures should be in place to protect against high winds, freak waves, measures required fire and lightning and vessel collision. Mitigation of design risk with a Contractual Service Agreement (CSA) provided by wind turbine manufacturer, covering maintenance and repair costs, can provide greater confidence to the underwriter. Page 23

Exemplified Insurance Application Form for Wind Power Installations (This application form is shortened and exemplified for educational purposes) The Insured has the obligation to respond to the hereafter indicated questions as accurately and truly as possible. If the reply does not correspond to the real installed equipment and installations the Insurer could, possibly, invoke cancellation of the policy after a one month period. In case of intentional omission of material information and/or gross negligence, the Insurer could cancel ab initio. The Insurer s withdrawal of the right of coverage is normally excluded, except in case of intentional omission of material information, even if the noted omission would have resulted in the Insurer taking on the risk with different terms and conditions. 1-Insured: 2-Country: County/Province: Location: Zip Code: Insurance Period From: 3-Machinery Breakdown Insurance Insured value machinery, new values basis*, include. Freight, civil works and peripheral equipment such as transformer, yard switchgear in $/EUR: *New value basis: indicate in or excluding VAT Manufacturer: Type: Year of construction: Name plate capacity: Height of nacelle (in m): Cable length (in m): Rotor diameter (in m): KW: Tower construction: steel tube - / mast tower Propeller manufacturer: Gearbox manufacturer: Type/construction: Serial number: Switchyard installed (yes/no): Manufacturer Capacity: To be insured (yes/no): MVA (Market Value Added) Value (in $/EUR): Hoist installation costs of 5,000 Euro are insured on first loss basis. Increase of first loss basis to (maximal 20,000 Euro) Deductible (in $/Euro): Page 24

4-Machinery Breakdown Business Interruption Calculate KWh: Plate capacity (KW) x peak load operating hours p.a. (please provide wind study pattern) Calculate Value in EUR: KWh (projected annual energy production) x production delivery price according the Power Purchase Agreement (provide copy) in EUR/KWh This insured Business Insured value (in $/EUR): Delivery period(s) (in days/weeks) Gearbox: Generator: Propeller: Period of Indemnity: 6 months Deductible: 5-Risk description Is the insured owner of the installation (Yes/No): If no who is Owner: Are all components tested and serial produced, i.e., there are no prototype or one of a kind installation (Yes/No): Has a commissioning test run been adequately executed with reaching name plate capacity (Yes/No): (add copy test acceptance protocol) Has a manufacturer s maintenance programme been contracted (Yes/No): (add copy) Does a manufacturer s warranty contract exist (Yes/No): (add copy) Does a service contract incl. a manufacturer s availability guaranty for the installation exist (Yes/No): (add copy) Has the Wind Energy Installation been fitted with a Condition Monitoring System (CMS) (Yes/No) If Yes, manufacturer: Type Has the CMS been certified by an acknowledged testing organisation (Yes/No) If yes by whom: (add copy manufacturer s declaration, that certified criteria have been complied with) Has the Wind Energy Installation been fitted with a State of the Art lightning protection system (Yes/No) Has the Wind Energy Installation been fitted with a fire detection system and/or automatic fire suppression extinguishing system (Yes/No): If yes, indicate manufacturer: Page 25

After the occurrence of a loss can restrictive measures be expected from local authorities (Yes/No): If yes, indicate which ones are likely: 6-Special Agreements 7-Existing coverage Does there exist insurance coverage (Yes/No): What type of cover does exist: Who is the insurer Coverage cancelled by insured/insurer: 8-Loss History 9-Signatures The undersigned parties warrant that the information supplied in this questionnaire is truthful and applies correctly to the installed Wind Energy Installation(s). Non-intentional omission of information will not jeopardise insurance coverage; however gross negligence in omitting material risk information, which unduly and unknowingly increases the risk for the underwriter, may trigger nullity of the contractual insurance terms ab initio. Page 26

6. Specific Considerations for Hydro Repetition from Module 2 Section 2 Characteristics Overall attractiveness Current situation Operating conditions Insurance maturity and loss experience Major known loss factors Insurance offerings Description Large-scale is already established and has proven attractive. Small-scale installations in developing countries and rural or remote areas are a leading source of renewable energy. Small hydro has significant potential and competitive generation costs. Storage reservoir systems require large space. Run-of-river systems require sufficient river flow. Large-scale hydro has well a developed, long-term, proven technology with low maintenance expenses and few operational risks. Small-scale hydro installations have a lifetime of up to 50 years. Flooding, seasonal / annual resource variability. Large Hydro: All insurance packages available. Small Hydro: Only few insurance offerings. Liability covers are becoming more widely available. Small hydro might benefit from large hydro s experience base and risk management understanding. Key Risks Flooding Seasonal / annual resource variability also caused by natural perils such as flood or drought. Prolonged breakdowns due to offsite monitoring and lack of spare parts. Risk Management Drivers / Measures Long-term proven technology with low operational risks and maintenance expenses. Large-scale hydro is a very well developed long-term proven technology with low maintenance expenses and few operational risks and barriers. Typically small-scale hydro has the capacity to generate less than 10 MW of energy. From a financing and risk perspective, small-scale hydro relies on the same technology and operating foundations and can benefit from the experience base of large-scale hydro. Lifetime of a hydro power plant is up to 50 years, due to the long-term infrastructure, mechanical and electrical lifetime of the installations. Small-scale run-of-river and reservoir storage systems are a leading renewable energy source in many remote and rural parts of the world. Page 27